Gifted Usufruct Rights in Real Estate
A usufruct right entitles a person to make comprehensive use of an asset owned by another person (e.g. an apartment) and to derive the benefits or income generated from it, such as the rental income from that apartment. For tax purposes, a distinction is made between a reserved usufruct ("Vorbehaltsfruchtgenuss"), where the former owner of an asset retains the right to use the asset and receive its income after transferring legal title to another person, and a granting usufruct ("Zuwendungsfruchtgenuss"), where the right of use and entitlement to income are transferred to another person while legal ownership of the asset remains unchanged.
Furthermore, a distinction is made between gross usufruct and net usufruct. Under a gross usufruct arrangement, the owner of the asset bears the major expenses, whereas under a net usufruct arrangement these expenses are borne by the usufructuary.
Facts of the Case
In 2024, a married couple agreed on a lifelong net granting usufruct with respect to three properties. The wife was the usufructuary, while the husband, as owner of the properties, granted the usufruct right. The usufructuary independently entered into lease agreements with the tenants, bore the ongoing costs, and collected the rental income. In addition, a compensation for substance depletion ("Substanzabgeltung") was agreed in favour of the husband in an amount equal to the depreciation for wear and tear (AfA) previously claimed. However, the capitalised value of the substance compensation calculated in accordance with the Austrian Valuation Act was only approximately 21% of the value of the capitalised usufruct right. Consequently, the tax authorities did not recognise the payments made as substance compensation as deductible income-related expenses.
Legal Opinion of the Federal Fiscal Court (BFG)
The Federal Fiscal Court (BFG) attributed the rental income for tax purposes to the usufructuary. However, the disputed issue was whether the substance compensation agreed in an amount equivalent to the depreciation (AfA) was tax deductible.
According to the established case law of the Austrian Supreme Administrative Court (VwGH), depreciation for wear and tear (AfA) is attributable to the beneficial owner rather than to the usufructuary. As no prohibition on disposal or encumbrance of the properties had been agreed and there were no other indications that the wife qualified as the beneficial owner, she was not entitled to claim depreciation relating to the buildings for tax purposes.
With regard to the agreed substance compensation, the BFG held that, although it was agreed clearly and on arm’s length terms, it must substantively be regarded as compensation for depreciation that the usufructuary was not entitled to claim for tax purposes due to her lack of beneficial ownership. Instead, the substance compensation was classified as a maintenance annuity not relevant for tax purposes, as the present value of the annuity was significantly less than 50% of the value of the usufruct right.